economy

[ketkoag]

There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur. These changes are either reductions in the supply of goods and services or increases in demand. In a prebanking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.
If the statements above are true, then it is also true that in a prebanking economy
(A) any inflation is the result of reductions in the supply of goods and services
(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation
(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result
(D) the quantity of goods and services purchasable by a given amount of gold is constant
(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services

[Pranay]

I would prefer C.

Please post the answer.

[KICKGMATASS123]

IMO B

The question states
1. There are 2 changes that cause inflation
i) Increase in Supply
ii) Increase in Demand

Unless other compensating changes occur...

Prebanking = standard of gold instead of level of demand

In B it says that other factors are constant and and level of demand increases therefore, in prebanking it is inferred level of gold increases = inflation will result!

Can we have the OA pls..

I found this to be tough..

[rahulg83]

There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur. These changes are either reductions in the supply of goods and services or increases in demand. In a prebanking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.
If the statements above are true, then it is also true that in a prebanking economy
(A) any inflation is the result of reductions in the supply of goods and services
(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation
(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result
(D) the quantity of goods and services purchasable by a given amount of gold is constant
(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services

I'd prefer B here, because Demand is equivalent to quantity of gold available. Now if Anything else is unchanged (Supply, compensating factors etc.) and demand increases, then inflation will occur. C is not preferable here because it uses extreme language. Anyways, reduction of gold decreases the demand, so this factor will oppose inflation rather than support it.

OA plz?

[anshulseth]

OA is B

But I have a doubt.

What do u consider gold in prebanking, supply or demand.

If supply, then C is correct, as reduction in supply cause inflation.
If demand, then B is correct.

Thus the confusion.

Can anyone explain it more logically.

[hk]

OA is B

But I have a doubt.

What do u consider gold in prebanking, supply or demand.

If supply, then C is correct, as reduction in supply cause inflation.
If demand, then B is correct.

Thus the confusion.

Can anyone explain it more logically.

I would go with B and here is my reasoning.

The argument says:

1. Inflation = Decrease in Supply OR Increase in Demand
2. Demand = Amount of gold.

Answer choice B says that if the amount of gold is increased there will be inflation which is correct as follows:

Increase in Gold = Increase in demand =>Inflation (According to 1 and 2)

But C is not true as Decrease in gold = decrease in demand and this would not lead to inflation according to 1.

[anshulseth]

@hk
You have not answered my question whether gold is to be taken as supply or demand.Could you shed some light on it.

[rs2010]

Yes is there any rationality for selecting demand as gold. It could be supply where author wants to show the balance between demand and supply by using work equivalent.

[thetrystero]

There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur. These changes are either reductions in the supply of goods and services or increases in demand. In a prebanking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.
If the statements above are true, then it is also true that in a prebanking economy
(A) any inflation is the result of reductions in the supply of goods and services
(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation
(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result
(D) the quantity of goods and services purchasable by a given amount of gold is constant
(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services

two factors causing inflation:
1. decrease in supply of goods
2. increase in demand/gold

A. could be due to increase in demand/gold as well (2).
B. sounds good.
C. opposite to (2).
D. contradicts the definition of inflation
E. although true, cannot be implied based on the given information.

My answer: B

[thetrystero]

... level of demand, is equivalent to the quantity of gold available.

@hemantsood, @anshulseth: i believe the question states quite clearly that demand=gold.

[anshulseth]

'equivalent' means equal in value, not the same as.
Thus the confusion.

[Minheequang]

I choose B
Fact:
Inflation is caused by 1)increase in demand or 2)decrease in supply (others unchanging)

In prebanking economy: quantity of money = level of demand = quantity of gold

Therefore, quantity of gold increase (=level of demand increase), other unchanging --> inflation occurs

[Brad.C]

It seems to me that the right answer should be C